As we roll out of tax season, I always take a few moments to reflect on the questions and concerns that clients express during the tax preparation process. One of the most common questions is “how have taxes changed?” For 2023, the response was for the most part a simple answer of nothing has really changed. Still, we do have to monitor the situation year to year as income tax changes can have significant implications for financial planning, influencing decisions related to saving, investing, spending, and retirement.
We know that the current tax structure is set to sunset or revert to the previous structure after 2025, so we need to start paying attention and planning. However, I don’t know that there won’t be major changes occurring before that date. President Biden released his FY 2025 budget last month, and it includes several tax changes. Being consistent with recent proposals, most of these changes are directed towards “wealthier taxpayers” as outlined in a recent Kiplinger’s article. Some of the more important proposals are:
Capital Gains Tax Increase
The budget would increase the capital gains tax from 20% to 39.6% for those taxpayers that make at least $1 million per year. While that doesn’t apply to many people, it is a significant increase for those impacted.
Medicare Tax Increase
Several of you know about the Medicare surcharge of 3.8%. The proposed budget would increase this to 5.0% for those making more than $400,000 a year.
Income Tax Rate
While income taxes aren’t set to change until the Trump Tax Cuts and Jobs Act reductions expire, the Biden proposal would increase the tax rates for those making over $400,000. Their new rate would be 39.6%, which is up from the current 37%.
New Home Buyer Credit
This Mortgage Relief Credit would provide eligible middle-class first-time buyers an annual tax credit of $5,000 for two years. There are also additional incentives to encourage current owners to sell starter homes and upgrade. This credit could be a one-year $10,000 credit. The details are still unclear on this proposal, but you can see the direction the administration wants to go.
Wealth Tax on Billionaires
This won’t apply to many people locally, but it’s an interesting proposal to understand. The Biden administration would like to apply a minimum 25% tax rate for households with net worth exceeding $100 million. According to the White House, the average tax rate for this group is 8.2% currently.
Like-Kind Exchange
The administration would like to close the loophole allowing real estate investors to defer paying tax on real estate transactions if they use the 1031 like-kind exchange rules. The White House said, “this amounts to an indefinite interest-free loan from the government”. This could be very impactful to some of our local residents that currently use this law to their advantage.
While many of these proposals currently lack the support needed to become law, we can identify the direction and priorities of the administration. The election in November will be a telling sign of what your tax structure will likely become in the near future. Overall, staying informed about income tax changes and proactively adjusting financial plans in response to these changes is crucial for optimizing tax efficiency and achieving long-term financial goals. We can help our clients navigate the complexities of tax planning and ensure that their financial strategies remain aligned with their objectives. Please reach out to us if you would like to discuss your situation with us.
